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New Real Estate Phase: Repricing Houses Downwards?

Saturday, March 25, 2006 | 08:17 AM

in Economy | Federal Reserve | Markets | Real Estate

As we noted Thursday, we had very strong existing home sales. But before you freak out about the Fed going to 6%, put this into context: After 5 months of decreasing sales, we had a nice bounce.

Call it a counter-trend rally. While I have believed since August 2005 that Real Estate is cooling off, this most recent data point is likely the result of stragglers finally getting to close loose ends from the prior few months sales.

Meanwhile, new home sales fell off the cliff, dropping 10.5% (seasonally adjusted) to an annual rate of 1.080 million. The WSJ reported the drop was "the biggest since an identical slide in April 1997 and the overall level of demand was the lowest since May 2003's 1.078 million annual rate."

Note, however, that any single month's New Home Sales Data tends to be unreliable; stick with a moving average.

So where are we now in the Real Estate market? This certainly is not the start of a new super cycle. Inventory rose 5.2% near an all-time record, there is 5.3 months supply (3.03 million). The 10.6% year-over-year price gain to $209,000 is a median (as opposed to unit price weighted average) -- in other words, its skewed by the high end. The entry level has been priced out of the market for too many people, hence, the skewing of prices.

I do suspect that much of the inventory out there is not for real -- i.e, sellers seeing if they can top tick the market and get top dollar, but not really entertaining many offers below their ask. These are casual, rather than serious sellers, and their inventory is merely tentative -- and temporary.

Anecdotally, Real Estate agents I have surveyed tell me the market is utterly dead -- and at the start of Spring, typically the beginning of the home shopping season (if you want to be in a new house for the kids to start the new school year in September).

And even more ominous for the macro economy, IBD reports that 29% of buyers in 2005 have zero equity in their house. The same is true for 9.4% of all mortgage borrowers. So while the sunshine crowd will tell you that homes are actually a savings vehicle, the reality for many home owners is quite different. (You are best off thinking about your house as a place to live that hopefully appreciates over the years -- not an ATM or a savings account).

Also noteworthy: foreclosures are on the rise.

Thus, the RE market has dropped from white hot to red hot to mid-plateau. We are now entering a period where the actual sellers -- motivated, but not desperate -- may start repricing their houses downwards. This is a process that may take some time, but do not be surprised to see 10% decreases in housing prices by the Fall.

This is unfolding pretty much on script.

The impact will show up in sentiment and in consumer spending over the next 18 months or so. As noted back in Janaury, as the Real Estate Souffle falls, it will beget a slow motion slowdown.

Sources:
Mortgage rates down a bit, delinquencies up
By Holden Lewis •
Bankrate.com, March 23, 2006
http://www.bankrate.com/brm/news/mtga/20060323a1.asp

New-Home Sales Tumble 10.5%;
Durable-Goods Picture Is Mixed
KEMBA J. DUNHAM
WSJ, March 25, 2006; Page A4
http://online.wsj.com/article/SB114320627985107436.html